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| ***Just keep seeing posts complaining about the estate tax and it made me do a little writing this morning. Not meant to offend anyone, just to think about the pretty blessed structure that farmers have in their industry at the moment.***
There have been many posts throughout the last couple years about the Estate Tax and many people’s different thoughts on it. I know I have a lot of people that disagree with my thoughts on it that it is a ‘voluntary tax’ and this gets people up in arms because you need to spend a few hours with an estate lawyer/cpa to get a trust setup, or whatever your style of protection is to roll the assets forward with no tax liability.
I know some people don’t like this as they consider it the government ‘taxing’ you by making you pay other people to protect these assets for you. While I don’t disagree that they are doing that, is it really such a horrific thing? You can spend $1,000 dollars one day to a lawyer to protect assets that have grown the way I listed below.
This is my for instance….
Farmer John back in the mid 80’s bought land for $1,200 an acre in NW Iowa (assuming you got lucky). Let’s say you were lucky to get into farming than and bought a quarter… So you now have 160acres, priced at $1,200 an acre = $192,000 investment. And you begin farming. You continue to accrue land and build assets over the next thirty years, using tax loopholes setup for the Ag industry (you are doing nothing illegal, just using what they allow you to do.) and you pick up another quarter every 8 years using equity from the existing land you own each time. (I will use an ISU sheet to guess the rough prices for this land, and assume you got some decent deals along the way as you are a prudent investor with good relationships with neighboring owners)
So he bought the following
160 – 1985 - $1,200 = $192,000
160 – 1993 - $1,500 = $240,000
160 – 2001 - $3,000 = $480,000
160 – 2009 - $5,500 = $880,000
So he now owns a full section. There might be some debt left on it, there might not be. But let’s assume he pulled equity out of his existing land to purchase new ground each time and just kept depreciating farm equipment and building bin sites, etc… as all farmers do.
So now he has ‘invested’ $1.792 M on land. Much of which has been paid for with very low tax rate income as you would have likely purchased much of that ground using the best tax setup you could, using equity from existing ‘unrealized capital gains’ to fund the purchases. So you spent money “forcefully against your will” to circumvent tax laws to keep your tax rate low (also such a horrible thing to be forced to do). Let’s assume that ground is now worth $10,000 today (safe assumption to say it average more than that) so subtract your cost of $1.792(much of which was accrued tax free), you now have an ‘unrealized’ capital gain of $4.608 MILLION dollars. So at current capital gains rates you are sitting on roughly a $700,000 tax bill if you were to sell and roll out of that land upon your death (assuming it was today). In 2013 you can add another third to that bill and put you just shy of a Million dollars’ worth of tax liability.
If you die January 1 2013 lets say, and this ground rolls forward to your children in a trust or any vehicle you choose. They reassess the value of it and your children could sell that entire section to an investor on a large sale and let’s assume you get top dollar… $13,000 an acre ie… $8,320,000… or a gross profit of $6.528 million. Which on capital gains of 20% would be 1.305M, but your family will shirk this entire expense because you spent one day, or 4-8hours with an attorney on planning.
Better yet; let’s assume they continue to go forward and pull equity out of that land and gobble up more. And in another 30 years, they have turned that section into 3 sections… Which are now worth 40,000 an acre – or $76,800,000 of which there has been no tax paid on since that initial land purchase of $192,000 dollars since 1985. And they can then pass on, and that land gets reassessed to its current value and the story continues, without capital gains…
On top of that simple structure, as a farmer; you have the ability to buy farm equipment, assets, and infrastructure and depreciate it down immediately and not pay tax on that. You can also carry grain forward into future years and roll that income around to avoid taxes and mitigate much of your tax liabilities. Yet on this board we continually hear people complain that we are ‘forced’ to do all these things to roll our assets forward. I do agree the health care law is beyond flawed, as is much of anything coming out of DC these days. I also agree with many things people like J Burns and others say about devaluation, inflation, etc…
***But as farmers do you really ever have the ability to complain about the tax code with the structures you have had setup for the last few decades? ***
Sorry for the long rant, just figured I would play Devil’s advocate here and point out some thoughts. Feel free to correct me if I am wrong on some of these points.
ND
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Thoughts on all the talk/complaining about taxes/estate tax on here.
